I'm fascinated with financial literacy and concerned teaching people about it seems an afterthought.
While it’s not an exact science, most small business owners go out on their own because they feel they can offer something better than what’s currently available in their industry.
After years of slugging it out for the man, they break the shackles and chart their own course forward. While I encourage this, it does present some problems - like financial management.
In the safety of a career - with a corporate or larger employee - most staff are shelied from the financial workings of a business. This makes a certain amount of sense as staff are employed to carry out the requirements of their role not keep accurate records on the state of the books.
It’s unsustainable to have a marketing or HR department constantly involved in the financial dealings of a business. Having and maintaining their own departmental budget is as far as it needs to go.
But as you leave your digital marketing role and start up your own small agency, where do you get your small business financial learnings form?
You learnt algebra at school (and haven’t used it since), but who taught you about;
Short of studying finance at university, chances are nobody did. To me, this is a failing in our education system and proves Gary Vee’s point that school equips students to be workers not entrepreneurs.
As an entrepreneur you’re very skilled at your craft - be it digital marketing or HR recruitment - but that doesn’t mean you know how to actually run a business.
Arguably, the most important factor in running a successful operation is financial management and cash flow is king.
Cash flow is described by the Corporate Finance Institute as:
“The increase or decrease in the amount of money a business, institution, or individual has. In finance, the term is used to describe the amount of cash (or currency) that is generated or consumed in a given time period.”
Not having positive cash flow (i.e. funds in the bank) will kill your business and see you chained back to your corporate desk in no time.
Without cash flow there’s no money to pay yourself, staff, expenses or anything really. That’s why you need to ensure you have adequate funds coming in to not only meet overheads but generate profit.
Here are some ways to remain cash flow positive.
Sending an invoice for work completed is one thing but getting it paid by your customer is another. In small business, unfortunately, it’s not uncommon for customers to be slow in paying.
Generally, most will miss the due date you set but will pay it at some point. Realistically, this is not done because they don’t value you, it’s because as another small business owner they’re in the same boat as you.
So, to preempt their tardiness make sure you send your invoices in advance of due dates and follow up. At Evolve to Grow our invoices are sent to a structure we know works and that your customers come to rely on.
While it won’t stop every customer, every month accidentally missing payment it will remind most.
Chances are, your customers will require you to complete a certain amount of work per month. If this is the case, sign them up to a monthly retainer agreement.
This does two things.
First, it makes it clear what work needs to be delivered and (more importantly) safeguards against a customer taking advantage of you by wanting you to complete extra work and claiming it to be part of your agreement.
This way it becomes so much easier and valid to invoice for work that’s outside of your remit
Working on retainer arrangements also guarantees you have money coming in each month that you can forecast for. Five customers all paying $2,000 per month means you should have at least $10,000 coming in (not including expenses).
Knowing this also sets a benchmark on how to grow your business month-on-month.
When it comes to spending money, it’s hard to go past the advice of a billionaire.
Warren Buffet, Chairman and CEO of Berkshire Hathaway, sums up what you need to do to remain cash flow positive:
“Rule number one is never lose money. Rule number two is never forget rule number one”.
Obviously, there are times in small business that you need to spend money - updating clapped-out equipment and travel expenses - but if it can be avoided or done more efficiently, do so.
So often it’s large overheads that bring a small business to its knees.
With the first sign of growth a construction company might go and purchase new utes and tools.
As a digital marketing agency increases their customer-base, they might suddenly believe a brand refresh is needed to capitalise on their new interest.
Only spend money when it’s backed up by evidence that it’s truly needed. If it’s going to turn your cash flow negative, it’s probably not the right time.
Raising your prices is an area most small business owners struggle with. It makes sense, as they’re happy to just have paying customers.
But if you’re consistently getting your customers a good result, then you’re entitled to raise your prices to reflect this.
The truth is, you probably started in business underquoting for your service anyway so it’s only natural you deserve more if you can prove your value.
However, this is not a price gouge and if your prices go up, it needs to be justifiable from your customer's perspective not yours.
Raising prices can mean you’ll lose your very price-sensitive customers but they ultimately don’t see the benefit in working with you anyway. If this happens you’ll have extra money from your other paying customers to cover it and more ability to find new customers who are prepared to pay you your worth from the beginning.
Don’t be scared to have this conversation with your customers.
Going into business with a skill set for your craft is an advantage but not being supported by detailed knowledge of your financial position month-on-month, year-on-year is counterproductive to your future success.
That’s why you need to understand financial management and know your cash flow position.
While it’s great to work with an Accountant and Bookkeeper, ultimately you need to be on top of your finances to remain viable long term.
A really good book that I recommend to all of my clients is Profit First by Mike Michalowicz. It simplifies how to manage your money that you have now and your future money.
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